Trusts

02/13/2013

Q: My late uncle was in a nursing home in New York State
for about a year. They were applying for Medicaid, but he died before they
finalized the Medicaid process. He left many bills, and a residence valued at
about $40,000. He also left a bank account with about $30,000 in trust for me.
Is that money mine, or will the nursing home or Medicaid come looking for it?

A: Medicaid isn’t one of your uncle’s creditors if the
Medicaid application process was never completed. But everyone else he owed
money to – including the nursing home -- definitely has a claim on his estate.

Your uncle's estate must pay his outstanding
bills before any assets are distributed to his heirs.

To be sure, New
York law does make some assets off limits to most
creditors: They can’t touch the proceeds of life insurance policies, or collect from annuities or retirement accounts that have designated
beneficiaries. If your uncle had named you as his IRA beneficiary, you could be confident of inheriting that account.

But a bank ‘in trust for’ account isn’t on the list of
protected assets. Your uncle’s creditors have first dibs on it. Depending on how much he owed that nursing home, there may be nothing left for you.

03/16/2011

Q: Is there a safe way to do a ‘life estate’ for a sibling? Let’s say Mary, who is single and childless, owns her own house in New York State. Her divorced sister Sally lives with her. Mary wants her sister Sally to inherit her house. Mary also wants to make sure that she won’t be kicked out of her own house during her lifetime, by Sally or anyone else -- like Sally’s future husband if she remarries.

Can Mary arrange things so that only her sister can inherit the house and no one else – like a husband or step-children if Sally remarries -- can have any legal claim on it? How can she avoid probate or any other problems or expenses with Sally inheriting the house? When Mary gets older, she may need to apply for Medicaid assistance for nursing home care. How can she make sure Medicaid cannot lay claim to the house?

Can Mary also make sure that her sister inherits whatever car she owns when she dies? Is there a way to avoid probate and extra expenses on that? Is there a ‘life estate’ for cars? – RE via email

A: Tell Mary to stop worrying about how to avoid probate!

The simplest way to make sure her sister inherits the house when she dies, but at the same time avoid giving her sister any control of the house during her lifetime, is for Mary to leave it to Sally in her will.

When Mary dies, her will goes through probate: Her executor presents the will to Surrogate’s Court. The court confirms that it’s a valid will and authorizes the executor to follow its instructions. And Sally gets the house (and the car). End of story.

As I’ve written many times, in New York this procedure is both quick and inexpensive. In most cases, it takes one to three weeks. New York’s probate fees range from as little as $45 to a maximum of $1,250. The maximum is charged on estates worth $500,000 or more. As for the legal fees, it’s a very simple matter to prepare and file probate documents. In the New York metropolitan area, the legal bill ranges from about $1,000 to $2,500.

A trust that avoids probate is going to cost more than probate! (And if Mary's estate incurs any administrative or tax filing expenses, they'll cost the same with a trust as they do with a will.)

Okay, so what are the alternatives to a will?

One is to die intestate -- i.e., without a will. You say Mary is unmarried and childless. If her parents are deceased and Sally is her only sibling, if Mary dies intestate then by law Sally will automatically inherit everything she owns. There's no will, so there's no probate.

Or Mary could transfer the house into a recovable trust, making herself the trustee. As the trustee, Mary controls the house during her lifetime. As the trust beneficiary, Sally inherits the house. Trust assets don't go through probate.

Another option is to make Sally a joint owner of the house with survivorship rights. Jointly-owned property doesn’t go through probate; it automatically goes to the surviving joint owner. The downside: Sally owns half the house. She has the legal right to sell or mortgage her half during Mary’s lifetime -- although in practical terms, that wouldn’t be easy. Sally could also lose her share of the house in a lawsuit or a future divorce . The worst case scenario: Sally's creditors could force a sale to recoup their money from her half of the proceeds.

Alternatively, Mary could use the strategy you’re talking about, which is called a transfer with retained life estate: Mary transfers the house to Sally, but keeps a life estate for herself. When Mary dies, the house avoids probate and goes automatically to Sally. During Mary's lifetime, Sally would have the legal right to sell the house -- but because Mary has a life estate, she couldn’t be forced to move out. Any sale would be subject to her right to continue living there. If Mary herself decided to sell the house, she’d have to share the proceeds with Sally.

I have never heard of transferring a car with retained life estate. It doesn't make financial sense to give away the future right to an asset that's going to expire before you do. And if you don't yet own the car, I don't see how you can transfer a future right to it.

What about Medicaid? It's true that under current New York law, Medicaid cannot claim assets that bypass probate. But that could soon change.

It's unclear from your question whether Mary wants to make sure that even after her own death, no future husband or stepchildren of Sally's will ever have any legal claim on the house. But if so, it's beyond the scope of this column, and requires consultation with an estate lawyer.

01/27/2011

Q: You've written that in New York, a will can override the beneficiary designation on an 'in trust for' bank account, sometimes called a Totten trust. Every bank has told me that this is not true. They say that the `in trust for' arrangement overrides the will. Please clear that up for me. -- TR via email

A: For legal advice, consult a lawyer, not a bank!

The banks are right that in general, a beneficiary designation overrides a will. Most accounts with a named beneficiary, such as retirement accounts and insurance policies, go to that beneficiary no matter what your will says.

But in Totten trusts, commonly known as bank `in trust for' accounts, are an exception to that rule, says Eric Kramer, an estate lawyer in Uniondale, N.Y.

New York's Estate Powers and Trust Law, Section 7-5.2, states that a Totten trust "can be revoked, terminated, or modified by the depositor's will, only by means of, and to the extent of, express direction concerning such trust account, which must be described in the will as being in trust for a named beneficiary in a named financial institution."

In other words, your will can override the 'in trust for' designation on your bank account -- but only if you're very specific. Your will would have to say something like: I hereby revoke my Totten trust at the Reliable Bank (account #123456) naming my daughter Mary Jones as beneficiary, and instead I leave account #123456 to my nephew Frank Smith.

Of course, it's sensible to make sure that there's no conflict between your beneficiary designations and your will.

And if you change your mind about the named beneficiary on a bank account, the solution is to go down to the bank and change the beneficiary designation. That's easier and simpler than changing your will -- not to mention less expensive!

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.

11/19/2010

Q: My father passed away in July, leaving an IRA in trust that is to be divided amongst the three children. We intend to divide the inherited IRA (carefully), and we know we will have to take mandatory distributions starting on December 31, 2011.

My father was over the age of 71 when he died, and had not yet taken his mandatory distribution for this year (2010). My question is: Do we need to take a mandatory distribution from the undivided IRA this year in the amount my father would have had to take? Or do we ignore the distribution this year and start our mandatory distributions individually next year? --SK via email

A: It's never a good idea to ignore a required IRA distribution!

After you turn 70 and a half, you must take a yearly minimum distribution from your IRA, and the year of your death is no exception. If you die before taking your required minimum distribution, your heirs must take it for you.

You say your father was over 71 when he died. Assuming he turned 70 and a half in 2009, he did indeed have to take a minimum 2010 IRA distribution.

Your deadline for taking his 2010 distribution for him is this December 31. To calculate the correct amount for that distribution, use the Uniform Table for Determining Lifetime Distributions. It's at the back of IRS Publication 529, which you can download here.

That actuarial table is only for IRA owners. To calculate your own required distributions, you and your siblings should use the Single Life Expectancy Table For Inherited IRAs, which you'll find in the same publication. As you say, your deadline for taking your distributions is December 31, 2011 -- the end of the year after your father's death.

Your father left the IRA to a trust to be divided between his three children. Assuming the wording of the trust allows it, each of you can take his or her share as an Inherited IRA -- but all three of you must use the life expectancy of the oldest to determine your required distributions, says Barry C. Picker, a Brooklyn tax accountant and IRA expert. (Other IRA owners, take note: That's one of the drawbacks of leaving an IRA to a trust for several beneficiaries. They can't each base required distributions on their own life expectancies.)

To determine the correct amount, divide your share on December 31 of the previous year -- i.e., 2010 -- by the life expectancy factor on the IRS table.

If the oldest will be 49 in 2011, for example, his life expectancy factor is 35.1.

If your share of the IRA is $25,000 on December 31 2010, your minimum annual withdrawal in 2011 would be $712.25 -- $25,000 divided by 35.1. Every year, your withdrawal will be based on the account balance at the end of the previous year; and every year, you'll reduce the original life expectancy factor by 1. (In 2012, your life expectancy factor will be 34.1; in 2013, it will be 33.1, etc.)

Of course, you can always take out more than the minimum. And as an IRA beneficiary, you don't own an early withdrawal penalty on distributions regardless of your age.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.